Vol.31-No.07 July 1,1992
1. Development of New Personnel Management System
Since the 1970s, Japanese corporations have been dealing with a variety of new challenges regarding employment management. The responses to these challenges have produced the concept of the "new personnel management" referring in entirety to the fact that changes encompass a wide scope of areas. The phenomenon called "diversification of employment and job patterns," it is fair to say, constitutes the central part of the new approach to personnel administration. This topic has already been dealt with in the Vol.29, No.10 issue of this Bulletin and the reader is asked to refer to it for further information on the topic. This paper will examine the annual pay system and the contract-based employee system that are the recent characteristics spreading among Japanese companies.
April 1992 newspapers reported the introduction of an annual pay system at Honda Motor Co., one of Japan's leading automakers. The articles in the newspapers stated that, "Starting in June, Honda will introduce an annual pay system for about 4,500 employees in managerial posts. Under this plan, once a year employees will meet with their supervisors on the amount of annual remuneration together with their qualifications and performance. No consideration will be given to length of service in determing annual pay." Many overseas readers perhaps wondered at validity of this news, as foreign companies generally adopt the annual pay system for management as well as non-management workers.K07C In Japan as well, before WW II remuneration of salaried workers in the upper echelon was determined on an annual basis. Even today "executives" generally receive remuneration determined on an annual basis.
But in the process of democratization following WW II, in the wake of societal calls for abolition of the sharp status distinctions between "workers" and "staffers," it became common for ordinary employees to be paid by the month. Let us take a look at Table which shows a 1980 Ministry of Labour survey on wages and working hours. The survey, though old, is useful for the following two reasons. First, the annual survey itself continues to be carried out, though some of the items given here have not been listed since 1980. Secondly, no changes have presumably occurred that would vastly altered the ratio shown. It can be seen from the survey that nine out of every 10 Japanese workers receive a monthly salary and that about half of them do not have pay deducted due to days off for some reason or another. Approximately 10 percent are paid on a daily or hourly basis, and slightly less than two percent are remunerated according to piecework. The percentage of workers receiving annual pay is too small to be statistically represented. This is true, however, when the survey is worker-based. According to a firm-based survey, conducted by the Research Institute of Labour Affairs Administration (RILAA), a private research organization, 8.3 percent of firms have already adopted annual remuneration systems. By company size 10.1 percent of companies with workforces of 3,000 and more regular employees, 6.8 percent of those with 1,000-2,999 regular employees and 8.7 percent of those with fewer than 1,000 regular employees have introduced such schemes. The survey, carried out between September and November 1991, covered a total of 2,840 corporations, of which 2,090 were listed on stock exchanges.
The percentage of firms implementing contract-based employee systems exceeds these figures. The RILAA survey found that 12.5 percent of the companies questioned have adopted the system. By company size, 17.7 percent of firms with 3,000 and more employees, 15.1 percent of those with 1,000-2,999 employees and 14.0 percent of those with fewer than 1,000 employees have implemented the contract based system, indicating that it is equally widespread among companies. A very interesting Ministry of Labour survey on the actual situation of diversifying job patterns, conducted in October 1987, also dealt with the contract-based employee system. The survey, covering 8,500 enterprises with 30 or more regular workers and a total of 30,000 regular workers, shows that 7.7 percent of the enterprises "employ workers under contract or registration conditions in professional jobs." There is a wide gap in the percentage of enterprises adopting the contract-based employee system between the former RILAA survey and the latter Ministry of Labour survey; this, however, is due in large part to the difference in the time when the surveys were carried out. Back in 1987, the RILAA survey also revealed that only 7.9 percent of the firms had implemented contract-based employee systems. In the meantime, the system, it is safe to say, has become rapidly diffused.
Of course, the contract-based employee system is not a common word among of individual firms. It is only a general term which covers a variety of systems adopted by each of the firms. What is common about the system, then? The definition used in the Ministry of Labour survey is suggestive, incorporating two elements, one "engage in professional jobs" and the other "under contract or registration conditions." The feature of this system is, first of all, making a contract with individuals. Individual workers enter into a contract with such conditions as the employment period, job content, wages and working hours as well as days of work all specified. The Labour Standards Law (LSL) prohibits employment contracts for a period longer than one year, and as a result the period of employment contract is one year or shorter. Part-timers also come under the same category as contract-based employees as long as employment contract for a fixed period of time is concerned, and there is nothing new in particular about the contract-based worker system. The system, however, is different in terms of making a contract individually. The second feature of the system which deserves attention is job content. In relation to this, a research and study report on labour patterns in new industries, new technologies and new occupations (Employment Information Center, 1989) notes as follows. Judging from the nature of the work, the contract-based employee is in many cases engaged in, so to speak, intermediate jobs and duties between the regular worker and the part-timer and the temporary worker. Also, the contract worker is not the full-time regular worker who does key jobs and duties, nor does he or she do peripheral jobs and duties like the part-time worker. At the same time, the contract-based worker is employed over a long period of time until he or she reaches the mandatory retirement age and is engaged in jobs and duties which cannot be done fully by the regular worker and which are not compatible with working conditions of the regular worker."
2. Background and Purpose of Implementation of the New Personnel Management System
Why, then, are Japanese firms trying to introduce this new personnel administration system? The reasons are twofold: procurement and motivation of personnel. These two factors have always been the central focus of new personnel management. These factors are now especially important because of managerial issues confronting Japanese corporations. Efforts to deal with these issues are resulting in the adoption of the annual pay system and the contract-based employee system.
First, there is a growing need for the motivation of personnel in a different fashion from before. Fundamental and underlying management strategies in the high economic growth period from the 1970s to the 1980s were to expand the combined mechanism of mass production, cost reduction and mass consumption. Consumers possessed a strong desire to purchase new products developed during the period, including home electric appliances and cars, and there was a gigantic market for such standardized, mass-produced goods. Efficient production and supply of these articles was a task of the greatest importance for companies, and workers were expected to work. The need for organizational harmony and balanced performance of duties was accordingly essential. Emphasis was placed on the "uniform" quality and level of labour. However, the spread of such standardized, mass-produced articles ultimately has saturated the market and brought about the need for the development and expansion of new markets as an urgent management issue. This would lead to what has been called the "management restructuring" since the late 1970s. The development of new markets requires the revitalization of diversified people with different ideas. Therefore, the fundamentals of personnel administration now emphasize on and the development of the ability of "individuals," not the organizational coherence of a homogenious group to maintain efficiency.
The traditional wage system under which wages hardly are influenced by the ability and contributions of individuals, was rational in its own way in a period when "uniformity" was emphasized. The system, however, made it difficult to bring out workers' ability and will to work and treat them accordingly. Thus, the need to introduce a wage system, under which goals are set annually for individual workers and wages are revised according to the goals achieved, emerged. In other words, the wage system is shifting toward an individual worker-based pay standard according to the level of his or her ability and performance. Here lies the first reason for the inauguration of the annual pay system.
The introduction of the annual remuneration system produces another effect from the viewpoint of the motivation of people. As mentioned earlier, it was common for executives to receive their remuneration on an annual basis. With this system, executives are imbued with a sense of being a "member of the management staff" and are expected to participate in management and display their leadership. Of course, these are not expected of all the workers. Those in managerial posts are mainly asked to meet these expectations. This is why the introduction of the annual pay system, in many cases, is restricted to management.
The second purpose of the inauguration of the annual salary system and the contract-based employee system is to secure personnel. Of the two major aspects of securing personnel, one is assuring people as members who shoulder management restructuring while the other is securing persons who will be active in the international business arena. Management restructuring means that corporations make a radical turn from their main field, or the products and services field, on which they have developed, to enter a new and untapped field. Naturally, firms have not accumulated knowledge and experience (professional ability) needed for the new field since they had no jobs, within the company, which called for such knowledge and experience. It is thus necessary to recruit personnel for the new job from other firms. Second, the new, untapped field is always unstable and is fraught with risk. But the existence of risk also holds possibilities. Therefore, when the company is forced to pull out of the new fields which have proven to be unsuccessful, "employment status" would be an impediment to those who conduct these new operations within the framework of Japanese-style lifetime employment practices. It is generally said that Japan's management and employment practices are flexible; in actuality, however, it is because of the rigidity of employment practices and regulations that the company is unable to dismiss employees except on extraordinary occasions. To cope adequately with such rigidity or to avoid dismissing workers, corporations must change their business fields in a flexible manner. Thus, when they launch into a business field with uncertain prospects, they try their best to be free from the rigidity of life time employment. Toward this end, they adopt the system of employing people with whom they enter into a contract individually which specifies the employment period and job content instead of hiring people as "regular full-time employees" without any definite employment period.
Furthermore, Japanese companies are presently promoting international development of their business activities. In this situation, recruiting people from an international sphere is becoming an issue. It is important to learn the commercial practices, legal systems and consumer attitudes in individual countries in conducting business activities abroad. Moreover, in order for Japanese employees to acquire a sense of internationalism, it has come to be significant for them to always be associated with non-Japanese workers. But to recruit foreign people, the traditional method of indicating wages on a monthly basis makes it difficult to compare wages in individual countries. In addition, for those wishing to find employment in Japanese corporations and to consider it as part of their career pattern, lifetime or long-term employment of an unspecified period is rarely appealing to them. This is another reason for the spread of the annual pay system and the contract-based employee system.
3. Adjusting with the Existing System and Practices
As we have seen, the new system, different from traditional Japanese employment and personnel administration systems, is gaining popularity. It cannot very well be free of traditional systems and practices, however as it requires adjustment with the latter. As a result, certain modifications are necessary of the initial consent or model intended for the new personnel management system. This is particularly notable in the annual remuneration system.
First, the new annual pay system calls for adjustment with the LSL. Article 24 of the LSL stipulates five principles: first, payment in cash; second, payment of wages directly to the worker; third, full payment; fourth, monthly payment; and fifth, payment at a definite date. Of the five principles of payment of wages, the third and fourth create a problem. Payment of wages once a month does not cause a major problem since wages are normally paid every month at a definite date even though the total amount of earnings is stated on an annual basis. The third principle, or payment of wages in full, on the other hand, poses a somewhat complicated problem. Under this principle, wages must be paid in full for the work done monthly, but payment of wages on an annual basis includes extraordinary wages, such as bonuses which do not correspond to wages for the work done for each of the months. Accordingly, the rest obtained by subtracting bonuses from total cash earnings is divided by 12 to calculate the amount of payment for each month. The annual pay is divided into two portions, a monthly salary and a bonus.
This mechanism becomes clearer in calculating social insurance premiums. The social insurance premiums are computed relative to the monthly pay, and the bonus does not apply to this method. The bonus, if included in the annual pay, will result in expensive social insurance premiums when it constitutes the basis for calculating premiums. Consequently, some kind of manipulation is executed to subtract the bonus from the annual salary.
The introduction of the annual remuneration system is characterized by the fact that the annual salary changes with an individual's contributions and degree to which he or she attains performance goals. This implies that an employee's life will tend to be unstable. As stated earlier, the concept of "stability" is an element most cherished in Japanese companies' personnel management. Thus, to switch to the annual pay system, Japanese firms try to take measures to keep wages within traditional levels for several years or to avoid lowering wages although they are affected by the differing contributions of individuals. All these measures are the product of adjustment of Japan's employment practices or legal system, and the new personnel management system thus introduced will be strongly colored with a distinctively Japanese quality. As we have seen, the following two points may be summarized regarding the annual pay system and the contract-based employee system. First, only a few corporations have adopted the two systems and the workers who will have the privilege of enjoying the systems are part of the workforce within the firm. Second, in introducing the systems, companies have taken adjustment measures to avoid creating a maior problem in relation to existing systems and practices. In this regard, it is inconceivable that the inauguration of the two systems will deal an immediate and heavy blow to traditional employment management and practices in Japanese corporations. However, the introduction of the new personnel management system underway in the meantime will unmistakably press for the amendment of Japan's employment management system. What is more, workers affected by the new system are not peripheral workers but those engaged in key, strategic jobs. In these two senses, the future of the new personnel management will deserve much attention.
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